Fears of a global credit crunch prompted by contagion from the crisis-hit US housing market led to panic selling and big falls on all the world's stock markets yesterday.

Amid concern that heavily leveraged corporate deals would collapse in an environment of dearer credit, the FTSE 100 lost more than 200 points and the authorities on Wall Street imposed trading curbs to slow the market's decline.

Analysts said markets had been affected by a cocktail of bad news - rising oil prices, evidence that the slump in the US housing market is deepening, speculation that dearer borrowing costs will slow takeovers, and signs that the problems from the sub-prime lending fiasco are spreading through the financial sector.

"This is credit-widening fear. You have flight-to-quality buying," said Thomas di Galoma, head of treasury trading at Jefferies & Co in New York. "The Street is in a risk-reduction mode."

Central banks have been stressing for some time that markets may have been putting too low a premium on riskier assets but have seen their warnings go unheeded. Analysts said yesterday, however, that the rising cost of credit was already affecting the financing of corporate deals.

The FTSE 100 was down 203.1 points at 6251.2 points at the close, wiping more than 3% off the value of leading shares, the biggest fall for more than five years. The FTSE 250 had its worst-ever day in points terms, plunging 382.5 points to 11033.4, the German DAX index was down more than 180 points and the French CAC index was slightly more than 160 points lower.

Shares in companies that had been driven higher on takeover and buyout hopes were the biggest casualty of a day that saw a fall in share prices begin in Asia and then ripple through Europe and North and South America.

Banks were left exposed after Chrysler and Alliance Boots failed to find buyers for the $20bn (£10bn) of loans needed to fund their buyouts and there were reports that Cadbury-Schweppes was struggling to obtain the $15bn it is seeking for its US soft drinks operation.

Investors headed for the traditional safe haven of US Treasury bonds as they lost their appetite for riskier assets, but the dollar was again under pressure on the foreign exchanges, holding its own against a weak pound but struggling against the yen and the euro.

Anxiety over the implications for the wider financial markets from the crisis in the US housing sector resurfaced as Washington reported that sales of new homes dropped by 6.6% last month and an Australian hedge fund heavily exposed to trades in sub-prime mortgages announced that it was suspending withdrawals. The fall in US house sales was the largest in five months and triple the amount that analysts had forecast.

"Housing basically seems to be a bust," said Stephen Carl, principal and head of equity trading at the Williams Capital Group in New York. "The economic numbers we're seeing are not strong at all. Oil is also not going to help."

The weakness in sales was met by a steady supply of housing on to the market. There were 537,000 new homes for sale in June, the same level reported in May.

As the deteriorating mortgage market caused more borrowers to default on their loans, more and more homes were being dumped back on to an already glutted market. Analysts said this over-supply was holding back any chance of recovery in the near future.

Adding to pressure on consumers already hard hit by falling house prices, the cost of US light crude rose above $77 a barrel on the commodities markets yesterday - its highest level for a year.

Wall Street's optimism in recent months has been underpinned by the feeling that the problems in the housing market had been contained and would not spill over into the wider economy. That view was being reassessed yesterday after news that non-defence durable goods orders - seen as a good guide to business spending - fell by 0.7% last month, well below expectations of a 0.8% gain.

"The US business sector may not be providing as much of a sturdy offset to the weak housing sector as expected," said Sherry Cooper, chief economist at BMO.

Moody's, a leading ratings agency, echoed this sentiment in its study of the mortgage credit market. Mark Zandi, Moody's chief economist, said he expected the downturn in the housing market to continue for at least another year.

The mortgage delinquency rate will peak at a record 3.6% next summer, with some 2.5m first mortgage loans defaulting over the next two years, Moody's predicted. By the middle of next year, prices will have fallen 10% from their peak at the end of 2005.

Mr Zandi said he expected unemployment to tick up as well with a tenth of the US workforce dependent on the housing market. Florida would be hit even harder, he said, with 20% of its workforce employed in housing-related industries.

In danger

Deals under threat:

· Terra Firma's £2.4bn bid for music group EMI, which closes on Sunday